Rational Capitalist on Facebook

Friday, June 1, 2007

Probe of Probes

I'm calling for a "probe" of the various "probes" that have been called for by politicians allegedly concerned about the high price of gasoline. Let's dub this a "meta-probe."


As I will show, the government does everything in its power to increase the price of gasoline, yet every time gas increases in price it is greeted as a shocking occurence - a Machiavellian conspiracy which can only be unravelled by a panel of government bureacrats. The bureacrats castigate the oil companies and Wall Street (naturally) and threaten them with "windfall profit" taxes among other punishments. Yet, it is the government's own policies which are driving gas prices higher. (And as always, supply and demand can have nothing to do with it.)

So what is causing recent increases in the price of gasoline?

Here is a link demonstrating how the government's push for biofuels is causing domestic producers to scale back plans for expanding refining capacity. Note, that biofuels is one of the campaign promises that Edwards puts forth in his "plan" to solve high gas prices!!!http://www.nytimes.com/2007/05/24/business/24refinery.html?ei=5065&en=88a4750c6b8de113&ex=1180584000&partner=MYWAY&pagewanted=print

Given the cost and onerous regulations involved in increasing refinery capacity or building new refineries, a company would need decades of recovery time in order to even consider undertaking such an investment. This alone has led to no new net refinery capacity since the early 1980s. Now, given the uncertainty of government policy in pushing and forcing alternative fuels, companies will simply not increase capacity which will result in decreased supply and higher costs.

Another obvious cause is local, state, and federal taxes on the purchase of gas which account for a significant portion of the price of a gallon. Depending on the state, it can run as much as 40 cents per gallon or more.

Of course sales taxes are obvious. Regulations and taxes on refiners are a hidden tax. The government has erected a byzantine web of environmental regulations which make it difficult or impossible to create new refineries.


The combination of high taxes and complicated regulations have prevented the construction of refineries in the United States since 1976. Aramco, an oil company owned by Saudi Arabia, has even offered to build two new refineries in the United States; but only if "someone else obtains all the necessary environmental permits first." It is not surprising that America's refining capacity hasn't increased since the early eighties.

If this is not enough, the government imposes tariffs on imports of refined gasoline to give domestic refiners an advantage. This naturally leads to inefficient domestic production and higher prices.

Protectionism such as this allows inefficient refineries to continue to operate within the United States, while competitors are prevented from importing gas at market prices. From the consumers' perspective, the extra one cent on the gallon translates into 42 cents on the barrel, and at 20 million barrels per day the American consumer spends an extra $8.4 million each day to support domestic refineries.

So, if taxes, regulations, tariffs, and government policy promoting alternative fuels are not enough what about the raw price of crude oil which as gone from about $10 a barrel 7 years ago to about $64 a barrel today. Government restrictions on domestic and off-shore drilling inspired by the ecology movement has led to a massive decrease in domestic drilling and further increased our reliance on the Middle East and other rogue foreign exporters (like the corrupt despots of Venezuela and Nigeria...). Naturally, this reliance on the Middle East and others has obvious geopolitical implications as you may have noticed.


Along with high taxes, environmental regulations--justified in the name of protecting nature from human activity--have dramatically increased the production costs, and thus the price, of oil and gasoline.

The government, for example, has closed huge areas to oil drilling, including the uninhabited wilderness of ANWR and the out-of-sight waters over the Atlantic and Pacific continental shelves. This of course significantly reduces the domestic supply of oil.

The government has also passed onerous environmental regulations that make it uneconomical for many old refineries to keep producing (50 out of 194 refineries were shut down from 1990 to 2004) and discourage new refineries from being built (no major refinery has been built in the last 30 years).


After an intense four-year struggle, Australian energy company BHP Billiton's attempt to build a Liquefied Natural Gas facility off the coast of California has been effectively killed by the state's Lands Commission, which voted 2-1 that its "Environmental Impact Report" was unsatisfactory.

If all of this is not enough to cause outrage over the government's role in increasing the price of gas - consider the effect of inflation! Inflation is an increase in the money supply caused by the government. The effect of "too many dollars chasing too few goods" is an across the board increase in the price of everything. Inflation is a hidden tax on everybody and is caused by government policy, namely the federal reserve printing money either to "stimulate" the economy or to fund the government's massive budget deficits. (see George Reisman at www.capitalism.net for a treatise on this topic.)

So please join me in calling for a meta-probe of the government's probes to demand that the government stop probing oil companies and begin to probe its own policies which cause the price of gasoline to be significantly higher than it should be and that increases our dependence on maniacal sheiks and dictators throughout the world.


Anonymous said...

Check this out-

looks like corn/ethanol producers are benefiting so much from high gas prices that we can slim down on the $5 billion in farm subsidies! yaya! but it looks like they simply want to decrease the subsidies slightly, package them differently, and shift them to favor corn/ethanol producers. I suppose legislation requiring ethanol mixes is an indirect subsidy anyway. Gotta keep those Iowan and Nebraskan farmers happy!

On a side, apparantly sugar cane yields much more energy per unit than corn. Unfortunately, the most effiecient sugar cane and ethanol producers are in Brazil. But they're kept out of american markets.

It's really nice that we keep poor countries out of the American agriculture market- one of their only opportunities to achieve competitive advantage.

The Rat Cap said...

Yes, farm subsidies is yet another example of how government takes money from some and gives it to others who have not earned it.

Morally and economically there is no rational justification for subisidies or for protectionism. There is no such thing as the "right" to make money from farming only the right to trade your goods freely with those who would buy them.

Of course, altruism is used as always to justify stealing from some to give to the poor farmers who for some reason have obtained a divine right to continue farming or at least pretending to farm whether they are productive or not.

Apparently, the mere act of living on or in proximity to "farmland" and going through the motions of being a farmer entitles you to steal money from others.

Politically, this is a mess. The congressman from these states can only get elected if they continue to support the graft and they sell themselves to get pork for their districts.

So, this is another example of why you need a Constitutional Republic - that is a government which is legally limited in its function and protects life, liberty, property and the pursuit of happiness. "Democracy" or unlimited majority rule leads to the many robbing the few.